A policy rate increase to stem the fall in the rupee may not be a good idea for India in the present situation, said Subhada Rao, chief economist, YES Bank.
“For an economy like India a rate hike at this juncture is not a good idea at all, because we already have weak demand conditions. So we do not see rate hikes actually playing any role in calming the demand, because the demand is not already there,” Rao told Firstpost in an interview.
A rate increase will jeopardise the corporate earnings, which will in turn adversely impact the much needed foreign capital flow into the country, she said.
A section of the experts had earlier suspected that in response to the sharp depreciation of the rupee, the RBI may reverse its easing stance and end up raising policy rates. The rupee hit a record low of 61.21 last week against the dollar due to strong outflow of foreign capital from Indian debt and equities.
The interview was conducted last week. Further clamping down on the specualtive elements in the currency market, the RBI yesterday squeezed the liquidity in the banking system, again sparking speculation that there could be a policy reversal.
However, Finance Minister P Chidambaram today morning quelled such rumours and said that the RBI moves are not a prelude to rate hike.
According to Rao, one of the reasons for the rupee hitting 60 levels was the geo-political tensions in Egypt and elsewhere, which pushed up the oil prices.
The bank, however, has not revised its estimates for the government’s fiscals as it is too early yet.
However, there are risks, especially on the oil front as the sudden rupee fall has spiked the oil subsidy significantly.
As of 16 July, diesel under recovery was Rs 9.45 per litre, a sharp increase from Rs 3.7 in May. Oil marketing companies are currently incurring daily under-recovery of Rs 362 crore on the sale of diesel, PDS kerosene and domestic LPG, according to data on Petroleum Planning and Analysis Cell.